Advanced Financial Accounting
Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
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Chapter 7, Problem 7.41AP

a

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The adjustments in trial balance to show effect of the given entry.

a

Expert Solution
Check Mark

Answer to Problem 7.41AP

The amount of differential as of January 1, 20X8 $120,000

Explanation of Solution

    Debit $credit $
    Income from S company2,000
    Investment in S company38,400
    Retained earnings40,400
    ParticularsP companyL company
    Debit $credit $Debit $credit $
    Cash and accounts receivables151,00055,000
    Inventory240,000100,000
    Land100,00080,000
    Buildings and equipment500,000150,000
    Investment in L company $201,600+$38,400240,000
    Cost of goods sold160,00080,000
    Depreciation and amortization25,00015,000
    Other expenses20,00010,000
    Dividends declared60,00035,000
    Accumulated depreciation230,00060,000
    Accounts payable60,00025,000
    Bonds payable200,00050,000
    Common stock300,000100,000
    Retained earnings $379,600+$40,400420,000140,000
    Sales250,000150,000
    Income from subsidiary $38,000$2,00036,000
    Total1,496,0001,496,000525,000525,000

b

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The entries that would have been recorded on P’s books during 20X7 if it had always used the modified equity method.

b

Expert Solution
Check Mark

Explanation of Solution

    ParticularsDebit $Credit $
    To record share in S company income:
    Investment in S company36,000
    Income from S company36,000
    (Investment in S company recognized)
    To record receipt of dividends from L:
    Cash28,000
    Investment in S company28,000
    (Received cash dividends from L)
  1. Income from subsidiary recognized and credited to income from subsidiary and debited to investment account
  2. Cash dividends received from subsidiary credited to investment account

c

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The consolidation entries required to prepare a three-part consolidated worksheet at December 31, 20X7

c

Expert Solution
Check Mark

Explanation of Solution

    ParticularsDebit $Credit $
    1. Elimination of beginning investment
    Common stock100,000
    Retained earnings140,000
    Income from L36,000
    Non-controlling interest in net income of L9,000
    Dividends declared35,000
    Investment in L200,000
    Non-controlling interest in net assets of L50,000
    (Beginning investment in S eliminated by reversal)
    2. Excess value of differential reclassification
    Retained earnings14,400
    Goodwill32,000
    Investment in L40,000
    Non-controlling interest in net assets of L6,400
    (Recognition of differential on land and goodwill)
    3. Elimination of intercompany receivables and payables
    Accounts payable4,000
    Cash and accounts receivable4,000
    (Intercompany other receivables and payables eliminated by setoff)
    4. Elimination of gain on purchase of land
    Retained earnings8,000
    Non-controlling interest in net income of L2,000
    Land10,000
    (Gain on purchase of land eliminated)
    5. Elimination of gain on equipment asset basis
    Retained earnings18,000
    Equipment5,000
    Accumulated depreciation23,000
    (Gain on equipment recognized)
    6. Excess depreciation recognized
    Accumulated depreciation 2,000
    Depreciation expenses2,000
    (Excess depreciation recognized)
  1. Elimination of beginning investment
  2. Investment in S Corp=($100,000+140,000+36,000+9,00035,000)×0.80=$200,000

      Non-controlling interest=($100,000+140,000+36,000+9,00035,000)×0.20=$50,000

  3. Differential on goodwill and retained earnings recognized
  4. Intercompany receivable and payable eliminated by setoff
  5. Gain on purchase of investment eliminated by reversal
  6. Gain on sale of equipment is eliminated by crediting and depreciation recognized

d

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The three part consolidation worksheet for December 31, 20X7.

d

Expert Solution
Check Mark

Answer to Problem 7.41AP

Balance as per three part consolidated work sheet:

  • Retained earnings $402,600
  • Net assets $1,088,000

Explanation of Solution

    Elimination
    ItemsP $S $Debit $Credit $Consolidation $
    Sales250,000150,000400,000
    Less:
    Cost of goods sold(160,000)(80,000)(240,000)
    Depreciation expenses(25,000)(15,000)2,000(38,000)
    Other expenses(20,000)(10,000)(30,000)
    Income from S Corp36,00036,000
    Consolidated net income92,000
    Non-controlling interest9,000(9,000)
    Net income carry forward81,00045,00045,0002,00083,000
    Retained earnings42,000140,000140,000
    14,400
    8,000
    18,000379,600
    Net income 81,00045,00045,0002,00083,000
    Less: Dividends declared(60,000)(35,000)35,000(60,000)
    Retained earnings Dec 31441,000150,000225,40037,000402,600
    Cash and receivables151,00055,0004,000202,000
    Inventory240,000100,000340,000
    Land100,00080,00010,000170,000
    Buildings & equipment500,000150,0005,000655,000
    Less: Accumulated depreciation(230,000)(60,000)2,00023,000(311,000)
    Investment in L240,000200,000
    40,000
    Goodwill32,00032,000
    Total Assets1,001,000325,00039,000277,0001,088,000
    Accounts payable60,00025,0004,00081,000
    Bonds payable200,00050,000250,000
    Common stock300,000100,000100,000300,000
    Retained earnings441,000150,000225,40037,000402,600
    Non-controlling interest in net assets of S 2,00050,00054,400
    6,400
    Total Liabilities & Equity1,001,000325,000331,40093,4001,088,000

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